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New Jersey High Court Finds Limit to Flood Coverage for Sandy Damage

August 23, 2017

The New Jersey Supreme Court rejected an
insurance policyholder's interpretation of a property insurance policy's limiting
language and its position that "any policyholder not involved in the
insurance industry is an unsophisticated policyholder", and it enforced a
$1,000,000 limit of flood coverage.

The policyholder's claim to its commercial
property insurer under its surplus lines policy included more than $1 million
in physical property damage plus more than $200,000 for the cost of debris
removal. There was no dispute as to a $1 million limit for property damage
under the policy's flood coverage. However, the policyholder claimed it was
entitled to more, under the policy's debris removal coverage, in excess of that
limit. The insurer responded that the flood coverage was limited to $1 million,
including the debris removal claim, and it paid the $1 million. Policyholder
sued for more.

The question was one of policy interpretation.
A thicket of policy terms, conditions and declarations, patched together in
separate forms and endorsements, set forth the ordinary property coverage,
additional flood coverage, and the extra coverage for debris removal. Could
they be resolved with each other, and if so, how? Time-honored legal doctrines
of contractual interpretation such as "plain meaning",
"reasonable expectations", and the "contra proferentem"
rule have been developed to guide courts in sorting out such problems.

The insurer contended that the policy language
was clear enough and set a single limit applying to this claim since it arose
out of a single flood occurrence. The policyholder contended that the policy
included a separate limit for debris removal, or it appeared to, or at least it
should. The issue became whether the policy was ambiguous, in which case the
court was obliged to find coverage.

At the trial court level, the insurer
prevailed: the policy was not ambiguous and the flood damage limit
"nullified" coverage above the limit. A general condition that the
policyholder relied upon was subject to a more specific term indicating that
the flood limit applied to "'all losses' caused by flood". There was
an appeal, and the Appellate Division reversed and remanded for entry of
judgment in favor of the policyholder. By its reading of the policy, the
different limits applied to different things: buildings, rather than
occurrences. This sweet harmonizing of conflicting terms would provide the
policy with the additional coverage limit.

The Supreme Court granted certification, and it
reversed and reinstated the trial court's decision. It held that, "[T]he
Flood Endorsement controls the extent of flood coverage and it is not modified
by the rest of the Policy's terms." For the high court, it was just a
matter of reading the plain language. It found "a conflicting
interpretation suggested by litigants rather than a genuine ambiguity",
and moreover the policyholder was not so unsophisticated that it should benefit
from special interpretive doctrines applying against insurers. Courts elsewhere
had interpreted similar policies the same way, supporting the high court's
reading.

The New Jersey Supreme Court's decision in
Oxford Realty has significance not just for those policyholders with flood and
debris removal coverage under similar policy terms and conditions. For those
policyholders, of course, the decision can have a very significant impact upon
their total recovery. For example in Oxford Realty, the additional the debris
removal limit would have added more than twenty percent to the policyholder's
ultimate recovery. In innumerable other settings, where policy declarations,
forms and endorsements pile up a confusing array of terms and conditions, this
decision signals that litigants should look first to the plain meaning.
Policyholders should not resort immediately to comforting doctrines, as the
high court can and may just wash their reliance on those doctrines away, like so
much shoreline in a bad storm.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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